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on Open Economy Macroeconomics |
| By: | Alvaro Silva; Julian di Giovanni; Muhammed A. Yildirim (Center for International Development at Harvard University); Sebnem Kalemli-Ozcan |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | Russia, Ukraine, China, COVID-19, Inflation |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:cid:wpfacu:440&r= |
| By: | Stephen McKnight (El Colegio de México); Laura Povoledo (University of the West of England) |
| Abstract: | We document important differences between developed and emerging market economies relating to the cyclical behaviour of international relative prices and quantities. In emerging markets, imports are more volatile than exports, the terms of trade is less volatile, and net exports are strongly countercyclical. While the terms of trade is procyclical in developed countries, it is generally acyclical or weakly countercyclical in emerging economies. We develop a two-sector small open economy model with an endogenous terms of trade and compare three mechanisms in an attempt to account for the empirical evidence: trend productivity shocks, interest-rate shocks in the presence of financial frictions, and informality. We find that trend productivity shocks is the most important mechanism in replicating the cyclical behaviour observed for the terms of trade and net exports. |
| Keywords: | Emerging Markets, Business Cycles, Terms of Trade, Net Exports, Informality |
| JEL: | E32 F41 F44 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:emx:ceedoc:2024-02&r= |
| By: | Valérie Mignon; Blaise Gnimassoun; Carl Grekou |
| Abstract: | Premature deindustrialization in most emerging and developing economies is one of the most striking stylized facts of the recent decades. In this paper, we provide solid empirical evidence supporting that the choice of a fixed exchange rate regime accelerates this phenomenon. Relying on a panel of 146 developed, emerging, and developing countries over the 1974-2019 period, we show that fixed exchange rate regimes have had a negative, significant, and robust effect on the size of the manufacturing sector —developing countries being the most affected by the industrial cost of such a regime. Additional gravity model regressions show that the impact of fixed regimes passes through the trade channel. In particular, this regime has kept countries with low relative productivity in a state of structural dependence on imports of manufactured products to the detriment of the emergence of a strong local manufacturing sector. |
| Keywords: | Exchange rate regimes; (De)industrialization; Manufacturing; Developing countries; Emerging economies |
| JEL: | E42 F43 F45 F6 O14 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2024-18&r= |
| By: | Saroj Bhattarai (University of Texas at Austin); Arpita Chatterjee (University of New South Wales); Gautham Udupa (CAFRAL, Reserve Bank of India) |
| Abstract: | Exogenous global commodity price shocks lead to a significant decline over time in Indian household consumption. These negative effects are heterogeneous along the income distribution: households in lower income groups experience more adverse consumption effects following an exogenous rise in food prices, whereas households in the lowest and the two highest income groups are affected similarly following an exogenous rise in oil prices. We investigate how income and relative price changes contribute to generating these heterogeneous effects. Global food price shocks lead to significant negative wage income effects that mirror the pattern of negative consumption effects along the income distribution. Both global oil and food price shocks pass-through to local consumer prices in India and increase the relative prices of fuel and food respectively. Expenditure share of food increases with such a rise in relative prices, which provides unambiguous evidence for nonhomothetic preferences. Using the expenditure share responses together with theory, we show that food, compared to fuel, is a necessary consumption good for all income groups. |
| Keywords: | Global Price shocks; Food prices; Oil prices; Inequality; Household heterogeneity; Household consumption; Necessary good; Non-homotheticity; India |
| JEL: | F41 F62 O11 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:swe:wpaper:2024-03&r= |
| By: | Leone, Fabrizio |
| Abstract: | U.S. equity outperformance and sustained dollar appreciation have led to large valuation gains for the rest of the world on the U.S. external position. I construct their global distribution, carefully accounting for the role of tax havens. Valuation gains are concentrated and large in developed countries, while developing countries have been mostly bypassed. To assess the welfare implications of these capital gains, I adopt a sufficient statistics approach. In contrast to the large wealth changes, most countries so far did not benefit much in welfare terms. This is because they did not rebalance their portfolios and realize their gains. In contrast, direct effects from the dollar appreciation on import and export prices are an order of magnitude larger. |
| Keywords: | Foreign Assets, Global Imbalances, Valuation Effects |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:docweb:2404&r= |
| By: | Stephen G. Cecchetti; Jens Hilscher |
| Abstract: | In response to the Global Financial Crisis, central banks engaged in large-scale asset purchases funded by the issuance of reserves. These “unconventional” policies continued during the pandemic, so that by 2022 central banks’ balance sheets had grown up to ten-fold. As a result of rapidly increasing interest rates, these massive portfolios began producing substantial losses. We interpret these losses as fiscal policy consequences of quantitative easing and stress that they must be balanced against the prior benefits of implementing purchase policies. Importantly, losses differ qualitatively depending on whether the central bank chooses to buy domestic or foreign assets, thus resulting in transfers either within or between countries. Effects of losses may differ due to accounting rules (when losses are realized) and when the fiscal authority compensates for losses (the structure of indemnification agreements). Data from the Federal Reserve, the Eurosystem, and the Bank of England show that maximum annual losses are between 0.3 and 1.5 percent of GDP. By contrast, the Swiss National Bank is sustaining losses up to 17 percent of GDP. |
| JEL: | E42 E52 E58 E63 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32478&r= |
| By: | ITO Hiroyuki; KAWAI Masahiro |
| Abstract: | The US dollar has long been the most dominant international currency used for international trade, investment, financial settlements, foreign exchange market trading, foreign reserve holding, and exchange rate anchoring. This paper develops a new method to estimate the size of major currency zones, i.e., those for the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound sterling (GBP), and Chinese yuan (RMB), and identify their determinants. The paper employs the simple Frankel-Wei (1994) and Kawai-Pontines (2016) estimation models to identify major anchor currencies and the degree of exchange rate stability (ERS) for each economy. The paper uses the estimated currency weights to construct the size of major currency zones globally and regionally over time and econometrically identify the determinants of these currency weights. In this analysis, the paper considers the degree of ERS, defined by the Root Mean Squared Error (RMSE) of the estimation model, which allows for the possibility that a part of each economy or region or part of the world is under a floating exchange rate regime. This method avoids overestimating the size of a particular major currency zone such as the RMB zone, when economies do not rigidly stabilize their currencies to such a major currency, and thus presents a better picture that is more consistent with the current state of the international monetary system. The paper yields several interesting results. First, the global economic share of the USD zone, still the largest in the world, has declined over time due to the emergence of the EUR zone and the recent rapid rise of the RMB zone. The size of the EUR zone is larger than that of the RMB zone if the degree of ERS is taken into account. Additionally, the share of the world economy under floating exchange rates has expanded in size over time. Second, the USD zone is the largest in the Middle East & Central Asia, followed by emerging & developing Asian and Sub-Saharan African economies, while the EUR zone is dominant in emerging & developing economies in Europe. The USD zone share has been declining rapidly in Latin America & the Caribbean. The size of the RMB zone has been increasing in most regions. Third, the USD weight is positively affected by the share of trade with the United States and the US dollar shares in export invoicing and cross-border bank liabilities. Similarly, the EUR weight is positively affected by economies’ shares of trade with the Euro Area as well as the euro shares in export invoicing, inward FDI stock, and cross-border bank liabilities. The RMB weight is not significantly affected by economies’ shares of trade with, or inward FDI stock or borrowing from China. The paper provides some policy implications. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24059&r= |
| By: | Mariano Kulish; James Morley; Nadine Yamout; Francesco Zanetti |
| Abstract: | We examine the relevance of Dutch Disease through the lens of an open-economy multisector model that features unemployment due to labor market frictions. Bayesian estimates for the model quantify the effects of both business cycle shocks and structural changes on the unemployment rate. Applying our model to the Australian economy, we find that the persistent rise in commodity prices in the 2000s led to an appreciation of the exchange rate and fall in net exports, resulting in upward pressure on unemployment due to sectoral shifts. However, this Dutch Disease effect is estimated to be quantitatively small and offset by an ongoing secular decline in the unemployment rate related to decreasing relative disutility of working in the non-tradable sector versus the tradable sector. The changes in labor supply preferences, along with shifts in household preferences towards non-tradable consumption that are akin to a process of structural transformation, makes the tradable sector more sensitive to commodity price shocks but a smaller fraction of the overall economy. We conclude that changes in commodity prices are not as relevant as other shocks or structural changes in accounting for unemployment even in a commodity-rich economy like Australia. |
| Keywords: | Dutch Disease, commodity prices, unemployment, structural change, structural transformation |
| JEL: | E52 E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11092&r= |
| By: | Bingxin Ann Xing; Bruno Feunou; Morvan Nongni-Donfack; Rodrigo Sekkel |
| Abstract: | This paper investigates the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden and the United Kingdom. We follow two complementary approaches: First, we apply a regression-based framework that aggregates the impact of daily macroeconomic news on bond yields to a lower quarterly frequency. Next, we estimate a macro-finance affine term structure model linking the daily news to lower-frequency changes in bond yields and their expectations and term premia. Both approaches show that U.S. macroeconomic news is an important source of lower-frequency quarterly fluctuations in bond yields in these small open economies—even more important than the respective countries’ domestic macroeconomic news. Furthermore, the macro-finance model shows that U.S. macroeconomic news is particularly important to explain low-frequency changes in the expectation components of the nominal, real and break-even inflation rates. |
| Keywords: | Central bank research, Econometric and statistical methods |
| JEL: | E43 E44 E47 G14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-12&r= |
| By: | Raphael Auer; Mathieu Pedemonte; Raphael Schoenle |
| Abstract: | Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. |
| Keywords: | globalisation, inflation, Phillips curve, monetary policy, global value chain, international inflation synchronisation |
| JEL: | E31 E52 E58 F02 F41 F42 F14 F62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1189&r= |
| By: | Musakwa, Mercy T; Odhiambo, Nicholas M |
| Abstract: | This study investigated the impact of remittances on the nominal exchange rate in Kenya, using annual time series data from 1980 to 2020. The study was motivated by the need to find out how remittances affect the exchange rate in Kenya on the back of an increase in remittance inflows in low- and middle-income countries, including Kenya. This is important as Kenya continues to build a stable macroeconomic environment that supports economic growth and other milestones specified in the Sustainable Development Goals. Using the autoregressive distributed lag approach to cointegration, the study found a positive relationship between remittances and the nominal exchange rate in both the short and long run. This implies that an increase in remittance inflows in Kenya leads to a depreciation of the currency. The study, therefore, concludes that remittance inflows in Kenya are not associated with the Dutch-disease phenomenon. |
| Keywords: | Kenya, remittances, exchange rate, autoregressive distributed lag, appreciation, depreciation |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:uza:wpaper:31197&r= |
| By: | Akira Kohsaka (Osaka School of International Public Policy, Osaka University) |
| Abstract: | A breakup of Euro Zone appeared likely in the aftermath of the Global Financial Crisis (GFC), while EU has long been model regional integration to East Asia. Recognizing different political-economic contexts between East Asia and EU, what can we learn from the experiences of Euro Zone so far? This paper tries to answer the question by examining regional financial integration in two regions in view of international macroeconomics. Financial globalization since the 1990s plays the key role there. We can summarize our observations as follows:East Asia’s fundamental strength shown throughout GFC implies weak motivation to promote further regional financial integration toward a monetary/fiscal union as EU. The global sudden stop of capital inflow by GFC seriously damaged vulnerable links in Euro Zone, although crisis-driven policy innovations seem to strengthen its macro-financial policy framework. As to the future role of Euro Zone, at issue is the volatility intrinsic to the global financial market, which would aggravate the asymmetry across currencies, potentially harming resource allocation and growth. Post-Bretton Woods flexible exchange rates could not wipe away, but magnify this asymmetry (i.e. US dollar dominance). The Euro and Euro Zone could challenge this fundamental flaw of the present international monetary system. |
| Keywords: | regional integration, East Asia, Euro Zone, financial globalization |
| JEL: | E5 F3 F41 G15 O11 O16 P51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:24e001&r= |
| By: | R, Pazhanisamy; Sri, Thomas Mathew |
| Abstract: | The global economy has witnessed significant transformations in recent decades, marked by the emergence of new economic powers and the evolution of financial systems. Within this context, the globalization of currencies has become a crucial aspect of international economic dynamics. This paper explores the globalization of the Indian Rupee within the framework of the new world economic order. It examines the factors driving the globalization of the rupee, including economic liberalization, financial market reforms, and India's growing integration into the global economy. Furthermore, the paper analyzes the implications of the Rupee's globalization for India's economy, financial markets, and monetary policy. By examining the possibilities of appreciation of Indian rupee and opportunities associated with the globalization of the Rupee, this paper aims to contribute to a better understanding of India's role in the evolving global economic landscape and its implications for domestic and international trade. |
| Keywords: | Money demand, currency in circulation, payment systems, monetary policy Foreign Exchange, International Policy, Globalization, Indian Rupee, New World Economic Order, Internationalization, Monetary Policy, Economic Integration. |
| JEL: | E4 E42 E47 E51 E52 F3 F31 F33 F4 G18 |
| Date: | 2024–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120650&r= |
| By: | Emre Yoldas |
| Abstract: | Most central banks tightened monetary policy considerably over the past few years as inflation surged globally. Though effects of the COVID pandemic on global supply chains and labor markets was a common factor driving inflation higher across economies, domestic factors led to notable variation in the timing and extent of monetary policy responses. |
| Date: | 2024–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-10-2&r= |